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So I don't know if you know this, guys, but four point six trillion dollars worth of market cap is reporting this week.
It was the third I.
Think busiest week for the S and P in terms of earnings. John Tucker super pumped. So I was reading, I'm Gina marn Adams Bloomberg Intelligence. He's a senior, a chief equity strategist, I should say, and they were kind of taking that broader look on the earning season, and she'd a really interesting point, And Gina, this is why I wanted to get you on to talk about it.
You guys say that if you look at guidance by the firms looking at about sixteen percent earnings growth, but earning's growth by analysts sees significantly less.
Is that kind of gap weird?
It is unusually large what we do find. Alex, First, thank you for having me on. Thank you for reading the work oh always. What we usually find is that company's guidance is a pretty good proxy for what to expect during the earning season. Analysts over the last several quarters have underestimated earnings have also undershot guidance, not just by this huge amount though. For instance, coming into the second quarter earning season, analysts we're expecting about eight percent
earnings growth, our guidance model was saying twelve. We ended up getting fourteen. This time around, analysts are expecting merely four percent earnings growth and our guidance model is saying fifteen sixteen, So it's a very big gap. I think a couple of things really explain the gap this time around. The first is when you look at the sector concentration of guidance, only about a fifth of S and P five hundred companies tend to guide earnings. That tend that
surprises a lot of people. It's not every company gives us guidance. We have to rely on a small subset of companies for this analysis. But nonetheless, of those about one hundred companies that give us guidance, most of them are tech, communications and consumer discretionary companies, so they also are concentrated in certain sectors. Now, Tech and communications in particular, we know are the strongest segments of the S and P five hundred. We've seen that play out over the
last year and a half. The weakest players in the S and P five hundred are energy companies. They're still producing double digit declines and earnings. Analyst consensus thinks they're going to give us another twenty percent drop in earnings year over year. They don't give us guidance at all. For the most part, they're just absent in the guidance trends,
so that we could have a sector skew happening. Nonetheless, that sector skew existed last quarter, and it gave us pretty good indication that analysts were too bearish.
Maybe it's just I want to underpromise and over deliver from my bi rated stocks. That's been known to happen, you know, once or twice. Yeah, once or twice. I never did it, of course, But no, no, no, of course.
Yeah.
Talk to us about the Magnificent seven and their presence in the marketplace in terms of taking this market higher. How important are they still and maybe from an earning's perspective to.
Yeah, well, clearly the market moves higher faster when the MAG seven are rising. Right when the Mag seven are leading, as we saw for the last majority of the last year or so, the market moves up at a faster pace because they're the bigger stocks. They're the biggest market cap latings they do matter. You can, however, have periods of time in which the Magnificent seven are not leading the market and you still have games. The third quarter was a good example of that. The Mag seven really
sputtered a bit in the third quarter sort of. We saw rotation move into other stocks. All other sectors started to break out in the month of August, reaching new highs when the Mag seven was still struggling beneath its former peak, and stocks still rose, but the rate of appreciation in the S and P five hundred does shift when your smaller players are rising faster than your bigger players. The worst case scenario is the MAG seven falls. It's really difficult for the index to make gains when the
Mag seven is selling off because they're so big. In particular, Tech and communications as whole sectors are gigantic. They're forty percent of the market cap of the index. So when those stocks are struggling it's very difficult for the rest of the S and P to recover, particularly at this stage of the cycle when you still have commodity prices and commodity length sectors as operating as a drag on index and a drag on index earnings. You do need some stability in the rest of the index to overcome
that earnings drag and that price drag. But they are still important. It's a matter of degree of importance, and you know, they're very important to the rate of appreciation in the market. They're very important to the overall trend in the market, and increasingly important also as a driver of earnings growth on the S and P five hundred.
Right, because of the hyperscaler situation, Like the more capex they spend, the more it trickles down into other sectors and other companies as well. What kind of capac spend from the hyperscaler is you think we're going to see for next year, and has that compare, say to this year, and is that like a disappointment, like what is good and bad? I'm using air quotes.
Yeah, I don't have any specific numbers on the hyperscalers. In particular, I would lean on our analysts in order to sort of derive those type of nuanced expectations or micro expectations. In terms of macro, what we're seeing is companies have realigned their capital spending in line with their sales, So capex ratios capex to sales ratios across the s
and P five hundred are very close to normalized. Now we're looking at still double digit capital spending growth, but that's down from extreme rapid capital spending growth coming out of the recession that we had in twenty twenty two. The vast majority of that improvement has come from tech and communication stocks, but you're seeing across the board more normalized capital spending, with the exception again of energy, where
this is just a big drag on the index. The commodity sensitive segments of the index are still experiencing low capex relative to sales. I do think that tech is a big portion of the overall optimism with respect to capex, but it's not the only thing happening. Healthcare is another area where we should see improvement in capital spending. Financials have been somewhat reticent to improve their capital spending pace, as we've been quite cautious or many financials managers have
been quite cautious with respect to the outlook. That group is starting to talk about spending on AI, for example, so that's something to watch going into twenty twenty five.
The long story short is CAPEX will still likely contribute to growth and likely contribute to overall optimist The only area where we may be spending a little too much is in tech and communications is among these companies where they've ramped up spending so fast, sales now need to spend a little bit of time catching up to accommodate that spending pace.
So what sectors are screening well for you guys these days, Gina.
Sure, it's a combination, a strange combination of cyclicals and defensive sectors. We actually still have both tech and communications the giants in the middle of our sectors scorecard. That happened for the first time in several quarters back in June. They dropped out of the leadership position on our sector rotation model and have been kind of sitting in the middle instead. It's more segments like healthcare, which was a big laggard last year, still a growth industry, but a
little bit of defensive quality. Real estate is toward the top of our sector's scorecard. Even some of the consumer stocks and the consumer staples group with screen as relatively well positioned given the dynamics of sectors right now, and interest rates seem to be driving a lot of choices because financials and utilities are toward the top of the scorecard as well, So fat that the Fed is reversing policy,
creating a potential improvement and lending conditions. Also, that rally in the long end of the curve, reducing pressure on some of the high borrowers in the index does seem to be characterizing the sector scorecard to some degree. At the same time, recovery and laggarts, So recovery and earnings laggards such as healthcare, real estate is starting to show.
Up, all right, you know, super appreciate it. It was a really great piece. I love digging into all your research, you know, Martin Adams, she heads up our equity strategist coverage for Bloomberg Intelligence. Only the best for you guys here at Bloomberg Intelligence.
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Crazy story out there Southwest Airlines one of my favorite stock symbols love LUV for love Field. Out there in the Dallas area, they have Elliott Management Investment Management calling for a special shareholder meeting, which is kicking off their firm's first US proxy fight since twenty seventeen. Let's get the latest reporting all that, Crystal see Bloomberg US Deals Reporter. So Elliott Management, Southwest, Southwest Airlines, what's the history there?
Yeah, So Elliott actually unveild does Steak in June saying that they have a significant position in Southwest and at this point they have eleven percent steak in Southwest, which is very very sizable in percentage and in a dollar amount it works about two billion dollars. What we know here is that Elliott's calling a special share owder meeting, which is an out of cycle investment meeting, and they're trying to elect eight members into the board.
Does love aka that's Luv is the ticket for Southwest?
Does Southwest have a leg to stand on?
So Southwest actually just put out a statement. They're saying that they have made every effort to reach a constructive resolution with Elliott. We all know that proxy fights are very expensive, They're very time consuming. So I think what Southwest here is saying that they've heard investors' feedback that nobody wants to fight. And it's actually something that's very common in the activism world that the investor would tell you they don't want to fight, company tell you they
don't want to fight. Activists doesn't want to fight either, but somehow they can't come to resolution, and here we are. So the contention, the tension here is really that Southwest has said that they are backing the management at backing the CEO, Bob Jordan, and they will already they have already done enough board refreshment, whereas Elliott thinks they need a control in the board to bank further changes.
Well, as you point out, I mean you're reporting here Elliott's they do this a lot in terms of activism, but what they don't typically do is take it to a shareholder vote. They usually get what they want. I guess before then, what's different here, do you think?
Yeah, so they have never done the US proxy fight since twenty seventeen. But this is quite significant in the activism world. They are usually very effective. The second they show up in any stock immediately the company take them, you know, very seriously. They try to come to a resolution because, like I said, proxy fights lengthy and costly. But southrest here somehow it is like evolved into this and that at many points, like people thought they could
have resolved. But I guess, like, yeah, there's some differences here.
What does Elliott want Southwest to do that Southwest is not doing because you'd think at this point it'd be like all options, all hands on Southwest deck here.
Yes, So Elliott has asked for three main things, which is leadership change, management change, board change, as well as operational improvement. And they've they've kind of pinned this on the CEO, Bob Jordan this whole time, saying that he's not the right person to execute whatever strategy that the company has put out. The company has said they would add revenue, they would cut cost.
Uh.
They even like kind an investor day in late September, and none of that kind of I guess like fulfilled like Elliott Stamon, which is a majority in the boardroom. So this is where we are, and they're calling it requested a meeting for December tenth, which is one of the busiest traveling season in the US in the world,
and so it's an interesting timing. And this is also one thing that Southwest is pointing at is like it's they call this a selfish request in their statements, saying that it is a time where Southwest should be executing.
Southwest they in July adopted a poison pill, so they're taking this seriously for sure.
Yeah, so a poison till is you know, as you know, something that stopped someone from the hostel takeover. And Elliott at that point had like close to ten percent, and ten percent is a threshold to call a special meeting, and the poison pillars for twelve and a half percent, so it stops Elliott from getting more shares than that, and once they do, acquiring more show would become really costly. So it's also a kind of rare occurrence these days. Not a lot of the company put in poison pills.
But again, Southwest is life full of surprises.
Yeah, tell me about it just before you go. How when these things unfold, is like Elliott Managements what they want now like here's the best bid, but like I'll take a little bit less, or do they really want to replace all these board seats, et cetera, et cetera.
So from our reporting, actually both sides have like spent a lot of time trying to figure out like how to not go to a fight, like whether we can do like Elliott had asked for majority seats. So at one point they nominated ten directors, and then Southwest Change came back and said, well, six of our directors left, were three seats open, which you pick three instead? You know, it's always a constant negotiation, is it? Three is a ten?
And I'm sure everything has been discussed. Everything you know on the table has been has been talked about, and but this is this is this is it? Like this will be up to shareholders to vote on who actually gets the majority in the boardroom.
All right, Crystal, thanks a lot, really appreciate it. Crystal see joining us Bloomberg US Deals reporter.
That's kind of fuss fun something to talk about.
I know, I like it.
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Ale steal here alongside John Tuger and pauls we need. This is Bloomberg Intelligence Radio. We are broadcasting to live from Interactive Broker Studio right here in midtown Manhattan. Those bond guys are still sleeping, but we're here and we're definitely working.
Also working.
Christina Hooper, chief Global market strategist over at Invesco. She joins us now in studio. Christina, I keep but yeah, okay, it's forty six record highs potentially if we close at.
These levels for the SMP. Do you buy it?
As in, are we climbing a walla warry? Or is this like a fundamentally lead driven rally and do you buy it?
I do buy it, so for a few reasons. First of all, we have central banks at our back. And it's not just the FED easing. We have a number of central banks easing. It's an environment of accommodation and that is supportive of risk assets, including equities, and I would argue that is the single largest driver of markets right now. But we also have an economy that is on pretty solid footing in the United States, and actually
elsewhere not so bad either. We're getting stimulus from China, so I think the global picture is quite good, but in particular in the US, I think that this is an economy that is going to slow only modestly, and then is going to quickly reaccelerate, probably by the end of this year early next year.
All right, Given that background stocks versus bonds, let's start there.
So I think there's a place for both in one's portfolio. It's important to be well diversified. I would err on the side of an overweighting of stocks relative to bonds, but I still see an attractive picture, especially now that yields have backed up. As an entry point for fixed income. This is an economy. I mean, in a normal environment, what we would see is the FED cutting as an economy is in bad shape. This is a very different scenario.
So we can go out on the risk spectrum when it comes to fixed income as well.
Isn't the reacceleration though, a risk because if you get really reacceleration of growth and inflation, that means actually the Fed's going to have to revert and start hiking again.
Is that a scenario for you.
Well, that's certainly a risk, but I think it's an unlikely risk right now. And I'm looking at six months out and what I see as an attractive picture for equities, And let's face it, if we get to an environment, I think what's much more likely is that we have a FED that slows down is easy, and I'm very comfort with that because it's slowing down, it's easing for good reasons.
So what do you think the FED will do for the remainder on the next three four meetings?
Maybe?
So I think that for.
This year we're probably only going to get twenty five basis points more and I'm very comfortable with that through the end of twenty four, Okay, and then I think we will see continued easing next year and we'll probably get maybe one hundred, one hundred and twenty five basis points if all goes well with this economy, which knock on wood, will happen.
If we do Tucker, did you have something?
Oh?
Oh if I'm just talking to myself, Ohky, it's.
A distinction we need to make here over So, but if we only get twenty five to the rest of the year, and we have to price that out. Does that cause turbulence in the market or do you think then earnings will be strong enough to show guys we're good?
I think so what we So we have gotten only a little bit of earning season thus far, but my takeaways are that the consumer is quite strong. Yes, there are there's weakness in lower income consumers, but the overall picture is a positive one. Companies are in pretty good shape, their plans to do more business travel next year. We're seeing a lot of different areas of real strength with
a few pockets of weakness. So I think that absolutely can be the picture and can I think encourage investors to continue to move stocks higher this year.
So are there sectors here that you want to play here? Because I'm I'm just looking at just at today's action. You know, the best performance has been some of the tried and true mag seven, the Invidios, the Metas, the Googles of the world. Are you comfortable still making that play or are you looking for value or in other parts of the market.
So this is an environment that will support a big tent under which many asset classes can exist, Although I do think the greatest potential from here are the smaller caps and the cyclicals because they are so closely correlated with the economy, and if you believe there's going to be an economic reacceleration, then and I do, I would argue for at least a modest overweighting of the cyclicals and the small caps.
It's interesting you say that because we had an article out today on the Boombrag that talked about how the russell is still ten percent below its record highs, but the small cap six hundred, which has more exposure to say quality, is almost near that twenty twenty one record. So is there a distinction within that small cap space.
Well, I certainly think there is a distinction right now, but that could change. Again.
We are just at.
The start of what could be a significant economic reacceleration, so I won't dismiss parts of the small cap universe. What I would say though, is that right now, as there is still some hesitancy and apprehension, there's a fair amount of uncertainty about a lot of different things, including what the Fed's going to do and who's going to win the presidential election, we're likely to see more of a focus and a desire to be in quality.
End the Bloomberg Index browser shows me kind of how the fixed income market is behaving, even though they're not working today. By far, the best performance has been US corporate high yield. Is that played out or is there still opportunity there? And I yield.
I think there's opportunity there. It's not a surprise to me. In fact, I go back to the last time the FED was able to successfully tighten and avoid a recession, so that was ninety four ninety five. They began to cut in ninety five ninety six, and if you look at the first six months of performance for a variety of different asset classes, as the FED started to cut,
high yield bonds did very well in that period. And I'm not surprised because they were cutting into a good environment, not dissimilar to where we are today.
Do you think that the post election makeup will be a headwind or a tailwind?
I can see a case for both.
Right, you get a headwind corporate taxes and tariffs is uncertainty removed in some capacity. Therefore there's been capex companies on the sidelines, not doing stuff they want to do, and therefore they go do it.
Which one? Which camp are you in?
Here.
I think it's going to be a net positive because we are going to see people coming off the sidelines we saw in the Federal Reserve Beige Book, and we're hearing it in some of the earnings calls that there are companies and consumers that are sitting on their hands right now, and so I think that encourages them to come back in spend more. So I think it's a net positive. Also, I harken back to the view that it is the FED that is a far more important driver earnings.
Just starting here, What do you need to see from Corporate America this earning season.
Well, I think they're going to beat expectations. That's what we need to see, and I think it's going to be very easy to do that. Expectations have been managed well, have been essentially downwardly revised, and so it's going to be able to They're going to be able to beat expectations by a significant amount, and I think that's.
Really all we need to see.
Also, I think it's important the guidance that we get for the future, and I think we will get relatively positive guidance.
Can we briden out for sec where else outside the US is a good opportunity.
Well, I'm excited about UK equities.
What said?
No one literally ever that that's not true? One or two people maybe in my time.
How come? Well, valuations are very attractive, as they have been forever.
Okay, But the catalyst is that we are now in an easing cycle and that certainly will be a helpful driver. It's also an economy that's actually in relatively good shape now. Consumer sentiment has turned negative recently, and I think what we're seeing is a sitting on of hands, not dis similar to the US right now because everyone's waiting and
worrying about the autumn budget. But once that has been released, I think we can move on from there, and that could very well be a catalyst in and of itself.
Which aid Keir Starmer on saying that the UK is open for business.
I bet he did.
Yeah, yeah, all right, So AI. It seems like the AI hype in the market has kind of faded a little bit now. People are starting to think about I don't know, mundane things about getting returns on investment and use cases and so on and so forth. How do you guys that invest go, how do your tech people what do they tell you about AI and what you should be paying for it and how you should be getting exposure to it.
Well, when we think about AI, it's really about how it can help companies and how it can help the economy, as opposed to I'm not thinking so much about myself, and so I'm excited. I think that certainly there has been a trend towards over investment in AI, but companies are making a rational decision and saying that it makes sense that the opportunity cost of not investing that risk
is far more significant. And by the way, there are some ancillary benefits to invest in that it structurally improves their technology in general, and they're better poised for the future. As a result, we're already seeing that companies are getting benefits from their AI investment. On an earnings call less quarter, I believe it was Walmart that talked about how AI has helped with online sales, and that is not an anomaly. A number of companies are seeing that, and that's just
the low hanging fruit. I think we're going to see AI pay dividends for years to come.
So pause into AI and I want to talk about China Xus there. So just quickly, we have about a minute left. If you're talking about a global using cycle in essence exception of Japan, does China fit that bill for you?
Absolutely? It is a very stimulative environment right now in China, and it's not just monetary policy. We're getting fiscal stimulus as well, and I think that is very compelling.
A lot of China folks felt like it wasn't enough, and I guess some people are saying, yeah, maybe it's not enough, but there's more to come, so don't worry about it. I mean, I don't follow that closely to you, is it?
So?
I think I think it's more about we don't have enough details yet, Although I'm excited. There are slow rolling out details, but everything we've heard thus far suggests these are going to be more structural reforms aimed at supporting the economy over the medium and longer term. So we might not get that immediate payoff, but as details continue to emerge, I think the picture will get more and more positive.
Right It's not like cutting checks right now to help stimulates a little bit more nuanced. Christina, it's so good to see you, so thanks so much for.
Coming, and we really appreciate it.
Christina Hooper a chief global market strategist over at Invesco.
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Alex Deal Paul Sweeney. We're live here in our Bloomberg Interactive Broker's studio. We're streaming live on YouTube. That is the Internet. I've been told go to YouTube dot com, Seart's Bloomberg Live Radio, and that's where you will find us. I covered the media industry for a long time, and boy, when I was covering it, everybody was making money. But man, the last seven eight nine years, it's been a really
tough place for investors to find consistent shareholder returns. And the big challenge for global media has been the single court cutting. I mean, it used to be such a great model and one hundred million American homes, we're paying, you know, one hundred bucks a month for all kinds of five hundred channels and all that kind of stuff. But since a cord cutting has really escalated or accelerator
over the last several years. Has been really a tough business model, and the companies you're trying to adapt, investors are trying to adapt. And I'll tell you the person the analyst who called this out first in my opinion and the loudest highlighting it as a risk for global media was Rich Greenfield. He's a partner and co founder
of Shed Partners. He joins us here. Rich, again, from my perspective, you were absolutely one of the first, if not the first, to really highlight this cord cutting risk for global media. Can you step back and help us think about where we are today and where we go because I'm just not sure when an if to invest in a media company anymore.
Well, look, I think it's really hard. There's no doubt that chord cutting has accelerated. And because chord cutting has accelerated, all of the legacy traditional media companies have all jumped headfirst into streaming. But as they've done that, they've actually, you know, to make the streaming services compelling. They've pushed all of their great content to their streaming services. So you don't, you know, outside of live sports, there isn't
a whole heck of a lot that's really compelling. Sure, you've got news or if you care about MSNBC or Fox News, although even CNN you can now get as part of Max. And so the number of things that you need the traditional bundle for has really shrunk pretty dramatically. And I think, you know, as you get more and more streaming services with great content and all the original content that you can't find on linear, it's pushing more
and more people to cut the chord. Or even if they don't cut the cord, you know, maybe they're a subscriber for part of the year, but you know, nobody signed up for Comcast or Charter Spectrum. Nobody used to sign up for three or four months. Now you can, like signing up for YouTube TV for a few months is easy. You know, you can watch for football season or if you love postseason baseball, go sign up, then you can cancel. I mean, it's just so easy to come in and out.
Yeah, it's those dynamics.
Are so different from the way it was where nobody called up Comcasts to have them rip the equipment out halfway through the year.
So to that point, I feel like saying this is going to get me in trouble somewhere?
Why is linear TV still a thing?
Linear TV is? I mean, I honestly think the only reason there are sixty seven sixty eight million homes paying you know, upwards of between seventy five and one hundred and twenty probably five dollars a month is live sports. I mean, sure, there's definitely some there's definitely an older demographic that has been doing it and you know, will never churn. But I think the reason why you have millions subscribing to YouTube TV and Hulu Live and continuing
to take Comcast is for live sports. I mean, if you want to watch all football games, college pro, you need a subscription to cable, satellite or one of these over the top like you know, YouTube TV bundles. There's no getting away from it. You still can't sure can you replicate a bunch of it in streaming? Yes, you know next year you'll be able to get even ESPN direct to consumer in September twenty twenty five, when you know,
Iiger finally pulls a trigger on that. But if you want to watch Fox Sports, you know, Fox football games yesterday afternoon, there's only one way to do it, which is sign up for a bundle.
All right, Rich, So if I'm the management team, if I am the board level at some of these linear media companies, what do I do. Is there ever a world when I can generate the profitability and the returns that I did six seven years ago? Or is that model just gone?
Look?
I think if any of these companies was able to get up into the top echelon, you know, to be a dominant player in streaming, that's certainly possible. Paul, I mean, I don't I wouldn't say. I think saying never is sort of difficult. But right now, I'd say, all of these traditional media companies, the one thing they're struggling with is they don't they're really optimizing for the wrong thing there,
like they've been focused on. Initially, they were just focused on subscriber growth, and so they just gunned it for subscriber growth. Profitability didn't matter. They were just you know, losses were piling up billions. I think between all of the major companies. I think they were losing like upwards of twelve billion dollars if you aggregated it all together between Disney and Warner and Peacock. So they realize that's not sustainable. So now they've been you know, slashing the
amount of programming, slashing the marketing, raising the price. And the thing that they're all missing is they're not gunning for time spent like Netflix never wants you leaving, Amazon never wants you leaving.
I think the.
Challenge for all of these companies is they're stuck in this weird middle of like they don't have enough scale, they don't really have the balance sheets to invest aggressively because they're dealing with you know, just as you were talking about at the beginning of this interview, the pressure from cord cutting on the linear business. We didn't even talk about advertising, which is under pressure. So your core
business is under pressure. It's very hard when your core business is under pressure to deploy even more capital to really gun it in the new business. And so you're stuck in this sort of what I would call this sort of ugly middle where you don't have enough scale, you haven't hit scale, and you don't really have a clear path. You're sort of hoping for consolidation, whether that's
streamer consolidation or whole company consolidation. But it is certainly a very difficult place to be, and I think if you look at this stock, all of these stocks as a group, it hasn't been pretty. I don't care whether it's Warner Brothers, Discovery or Disney, even Comcasts, like this whole space has not been a great place to make money. And I don't think in the next twelve months do I see any green shoots or some major change it's going to make you say, oh my god, this space
is on fire. Answer is no.
Hey, rich, before I let you go, Tom Keen wanted me to ask you here, Warner Brothers Discovery, can you give me thirty seconds on that name.
Look, it's David Zaslov has to prove to Wall Street. This is purely a David Zaslov execution story. They didn't renew the NBA. Yes, they're suing. I think there's highly unlikely to win that suit. But the key question for the future of WBT Warner Brothers Discovery is was dropping the NBA or not renewing the NBA? Is that existential?
Because if they can get their deals done with Comcast and other distributors over the coming year, then getting rid of you know what would have been two plus billion dollars of cost is a home run.
For the stop.
Investors don't believe it. Investors believe that this is a catastrophic loss that they're going to get, maybe not dropped by Comcast, but a severe reduction in fees. And so this is purely can David Zaslov prove two investors that they are strong enough to withstand the loss of the NBA. You're going to find out over the next six months.
All Right, Rich, always great to talk with You really appreciate you taking a few minutes of your time. Rich Greenfield. He's a partner and co founder of Lightshed Partners.
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Alex Steel, Paul Sweeney.
This is Bloomberg Intelligence Radio. Every day Bloomberg puts out a big take.
It's great stuff.
You can get it on podcasts, you can get it in print, you can get it on Bloomberg dot com and on the terminal. And today's big Take story is cat bonds will help Florida but failed Jamaica. So that story is part of Bloomberg Green's investigation into how climate change is making parts of the planet uninsurable, leaving millions of people without a safety net. And the point is
that governments and companies aren't prepared. And this is part three, So we want to turn to Bloomberg ESG editor Gautam Nick who joins us now walk us through this this part three of this series that you guys have been doing.
Sure good to be on the show. So essentially, this particular story I've done with a couple of colleagues looks at catastrophe bonds. These are a bet on the probability of huge natural disasters like earthquakes, wildfires, floods, are hurricanes, And obviously the incidents of some of these events have gotten higher and the severity of some climate related events
like hurricanes and floods have become more intense. So these catastrophe bonds are a way for insurance and reinsurance companies to pass on the risk of growing disasters onto Wall Street, onto the capital markets, and not to put it on their own balance sheet. The way it works is that if you're an investor in the bond, you can make a very large return, could be fined hard to find
in you another fixed income product. However, if the particular disaster that is defined in the bond does occur, then you could lose some or even all of your invested capital. So it's a gamble on a weather disaster.
Very simply.
Did these work?
Yes, they absolutely do work. So just to give you the broader context, about seventy percent of all catastrophe bonds are focused on the US windstorm sector use hurricanes and other severe name storms, and a big chunk of that relates to Florida. Obviously, this came into focus recently because of Hurricanes Helene and Milton back to back that caused
a lot of flooding and wind damage as well. And the way it works is that if a particular threshold of losses is met for most of these catastrophe bonds, then the issuing party will get a good chunk of the money that's taken out from the money that the capital markets, the Wall Street investors put in when they bought the bond, and that money then goes to big to fix people's roofs and you know, rebuilt homes.
When has it not worked?
As I mentioned the title was, they helped Florida but failed Jamaica. So what's the scenario where they don't pay off?
Yeah, So catastrophe bonds have been around for about twenty five to thirty years, and they've largely developed, as I said, in the US, but also in Europe and Japan against earthquake risk. But increasingly institutions like the World Bank, the IMF,
the OECD are trying to popularize them in the developing world. Now, this is a part of the globe that is being disproportionately hit by a lot of climate losses to which they're not directly linked because you know, most of the emissions have come from since the Industrial Revolution in the western parts of the world, but a lot of these weather disasters are being you know focused on the you know,
southern hemisphere. So the World Bank and other institutions are trying to get developing countries that are facing these risks to issue these catastrophe bonds that have been around in the West. But there is a problem the way the bond is structured. In the West, the ways developed seems to work quite well, but in a developing country because they don't have an insurance market. You can't actually calculate the total claims on an insured basis, so they've come
up with a different way of structuring the bond. It's called a parametric approach. Basically, for a hurricane, it would simply be if the pressure of the hurricane hits a certain threshold, which indicates wind speed, then the bond will pay out. But if it misses, you get nothing. Even if you missed by the tiniest fractions, the rules say you will get zero, and that's sort of what happened with Jamaica.
It would seem like if you believe in climate change, and if you believe that weathers can become more and more unstable, it might be really hard to price the risk out here because it seems like the risk would always be going up of more and more again unstable weather and catastrophes. Here, how does the market account for that?
You've been pointed a problem. So when someone's trying to calculate the risk of these kind of weather related catastrophe bonds,
all you have really is historical data. So for hurricanes, you have one hundred and fifty hundred and seventy years, a pretty robust data going back and you can make a good estimate, but unfortunately the calculation has been muddied now with climate change, and these forecasts are of course forecasts is something that hasn't happened yet that will project it to happen, but you just don't know how it might unfold, depending on, you know, how the world reacts
to increased CO two E missions. So the whole question is how do you incorporate the climate effect into this historical data and provide a really reliable metric for someone to make a financial bet on. And it's the uncertain and of well, to some extent the models that are used there by no means perfect, but also this extra new element that we've seen in the last few decades of climate change.
So you guys, as I mentioned in the beginning, this is part three of a series that you guys have done into how climate change is making the planet uninsurable.
What is your key takeaway here?
I think one of the main takeaways would be that it is very hard to accurately model the risk of climate change, and of course their attempts being made to refine it constantly, But if you're trying to ensure a large proportion of the world that is not insured, in the developing world, also parts of Europe. I mean, there's a huge insurance protection gap in Europe, and even in the US, for example, in Florida, you know, insurance companies
are moved out. They're not providing insurance in California for earthquake risks and wildfi they're moving out. So the main takeaway is that it's become a more difficult problem. It's becoming a more unensurable planet because of climate risk.
All right, gauth Tom, thank you so much. We appreciate that. Got Tom and Nike Eesg editor for Bloomberg News, joining us on zoom from London. You can read gaut Tom's story and more from Bloomberg The Big Take on the Bloomberg Terminal and at Bloomberg dot com Slash Big Take. Some good stuff there, some great reporting, some great graphics. I always like the graphics folks do some great jobs
to bring the stories to life there as well. Illustrations for this story by John Prevenure for Bloomberg Green like to call him out, So yeah, I would think, boy, if I'm trying to structure a bond, I'm like, I don't know how what the risk is this thing?
It just seems like it's getting worse and worse every year.
Well here's my question then too, is that say you're able to finally figure out the correct structure, right, then the weather changes again yep, So then how do you manage that part?
Right?
So, just because you might have you know, huge windstorms in one area, now, are you going to have them in fifteen years to have solar issues or is it going to be floods? It's something different than how do you manage that?
Yeah?
And if I'm on an investor in these bonds, I'm like, you better pay me a huge way.
Which they do to be fair.
Yea.
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This is Bloomberg Intelligence Radio.
We bring you all the top news and business, economics and finance through a lens of our Bloomberg Intelligence Folks. And every week around this time we tap our amazing resource over at Bloomberg bn EF previously known as Bloomberg New Energy Finance BINF basically tracks everything that you need to know from commodities, power, transport, industry, buildings, ag as well as how to finance the energy transition. And joining us now is Kyle Harrison, head of Sustainability Research at
Bloomberg bn EF. He joins US now, So let's take a look at corporations and how many and what kind of corporations have signed green PPA is known as power purchase agreements, which is basically like they're getting their electricity and power and stuff through green things exactly.
So they're locking into long term contracts for typically solar windpower, but we're now seeing them expand into other forms of low carbon technology for example like nuclear, like hydro and geothermal. Big technology companies have really led in this space. So it's the companies like Amazon, Meta, Google, Microsoft, they're signing the most deals at a large scale. But we're seeing a lot of heavy emitting, hard to abate sectors getting
into this space now. So materials companies, industrials, oil and gas companies, they're starting to break into new markets where big tech maybe doesn't have as big of a footprint, and they're starting to sign these long term, large scale clean energy deals.
Where are the clean energy deals happening? Is it here in the US? Is it in Europe? Where are these things mostly happening?
Historically was the US, So between twenty fifteen and twenty twenty two, around two thirds of all these corporate clean energy power purchase agreements were signed in the United States. In twenty twenty three, that number drop to around forty five percent. So corporations are increasingly spreading out and signing deals in Europe, in Latin America and Southeast Asia for example.
In Asia in particular, you have a lot of demand for electricity from corporations and you have a huge supply chain footprint, and historically those companies haven't been able to buy clean energy. But through a lot of policy lobbying and a lot of work on the ground with regulators, you now have opportunities to buy clean energy in Japan, South Korea, Vietnam's and new market So there's a lot of new, exciting expansion.
What's the price for these things and how do they compare to traditional energy?
So that's big been one of the biggest drivers in the growth of this market. Right So through September of this year, companies have announced over thirty one gigawatts of clean energy through corporate power purchase agreements. That's the size of a small in a given year, and we're on record pace. And the biggest reason for that is that solarned wind on a new build basis are now cheaper
than colon gas in many markets around the world. So as a corporate buyer, I can undercut those prices for power that I might be paying, for example, from a utility or from the grid by locking into a long term fixed contract for renewables.
And for renewables. Is this is the adoption of renewables or the growth of the renewables market. Is that driven by the market or by regulations governments saying you gotta do this? What do we learn?
I mean to the last question, it's really primarily driven by economics. But reliability is a huge factor here. So big technology companies they're now going out, they're building these data centers. You're seeing a big expansion in manufacturing capacity. All of this requires the lights to be on twenty four to seven, right, so you can't afford to have a power outage or a grid failure. So locking into one of these contracts for solarned wind that gives you
more reliability. And again that expansion into other forms of what we would call zero carbon based load power that could generate twenty four to seven, like nuclear and geothermal, that also kind of emphasizes that reliability. So it's a combo of that along with sustainability.
And how do you think that this sort of partnership and evolution happens. It's still going to be these long term power purchase agreements or is it going to be like these hyperscalers And you know, maybe even like a SMIT industry or the hard to abate industry just sets up like their little small modular reactor right next to their facility, or a wind farm right next to their facility. I mean, I'm being hyperbole, but you get the idea. Versus plugging into the grid for example, you.
Definitely need collaboration on the grid side, right and the utility scale side of this market. Of course, there are opportunities to build a solar project or a wind farm on site and leverage energy storage to get that power directly, but we need utilities, right, and we need grid planners to start collaborating with these corporate buyers to ensure that
this grid scale up is done sustainably. If we start to build all these hyperscaler data centers in for example, example the Data Center corridor in the eastern US or in Texas, you need to ensure that there's enough transmission capacity to ensure that that power gets moved from A to B right, So that starts to involve regulators, that starts to involve utilities. So it really is kind of an approach that everyone needs to be involved in for this to be successful.
You know where they do wind farms in a big way Ireland, driving around tons of a lot of.
Data centers in Ireland as well, so it's extra important there all right.
So yeah, so they were ever there. There's big ones as well, and it's windy there, so it works being an island and all talk to just about you mentioned nuclear energy. What's the future of nuclear here in this country? Can we build these little nuclear plants that can do things and not pose a big risk.
So I, unfortunately I can't comment too much on nuclear. If we have a nuclear guy, we do have a nuclear guy I'll leave it to him. But what I would say five people there, what I would say is right, there was a lot of a lot of noise around on this announcement from Microsoft around through Mile Island through My Island is a name, Right, that's a project that obviously evokes a lot of emotion. But we're going to see a lot of corporations continue to look for those
deals with that zero carbon based low power. So we wrote about this the other week. This won't be the last nuclear deal from big tech, right, You'll see more geothermal deals. So it's going to play a really important role here as a reliable source of power that's also low carbon.
What I think I understand though from that particular agreement is that the three mile So Constellation Energy will revamp its nuclear reactor and turn it online into the grid. Then Microsoft will pay the difference to Constellation Energy from what it would cost to get from the grid versus this nuclear facility. So it's like done differently. It's not like the nuclear is going to like plug right into a Microsoft hyperscaler.
It's like they're still going to take from the grid.
So it's all these like weird agreements that that I feel like you're going to have to tell you I read a book called did you They're very excited about reading the Grid and then newlicks Exactly do you want to know anything?
They got it? What region is signing the most of these clean PPAs right now?
It's Texas And it's based purely on economics. So in for example, northern and western Texas, the price of power for wind is incredibly cheap, and you have fantastic wind resources, so you have a lot of companies going out and signing deals there. But increasingly companies want to emphasize where can they make the biggest impact by adding clean power?
If you already have all of this low carbon wind and solar generating in Texas, are you really making that much of a difference by adding another project there, for example, compared to the eastern US, where you have more coal power, right where you can have a bigger impact on decarbonizing the grid. So what we're going to slowly start to see is more corporations expand that footprint both to other parts of the United States outside of Texas, but other new regions in the world as well.
Coal in the US anymore, we still have.
Coal well, I mean I guess we can follow the lead of the UK, right, which just retired it. Yeah, that's final col project.
But they still have them right.
Uh Johnny in the boat.
I do have a bag of cold in the base. Yes, John Tuckers.
Can't know what you're actually kidding.
Yeah, that's the thing. He's not all right. Thanks a lot.
We really appreciate Chyleer Caryl Harrison, the last holdout Bloomberg Vienni, Head of Sustainability a research joining us on those trends in sustainability.
This is the Bloomberg Intelligence Podcast, available on Apples, Spotify, and anywhere else you get your podcasts. Listen live each weekday ten am to noon Eastern on Bloomberg dot com, the iHeart Radio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.